M&A & exit
Escrow holdback
Portion of purchase price held back at closing in an escrow account to secure post-close indemnity claims.
Definition
An escrow holdback is a portion of the purchase price withheld at closing and deposited with an escrow agent to secure the seller's post-closing indemnification obligations. Typical sizes range from 10-20% of purchase price for 12-24 months. If the buyer makes a successful indemnity claim within the escrow period, funds are released to the buyer. Any remaining balance at the end of the escrow period is released to the seller.
Same concept, different references
| Canada (common law) | Escrow holdback, contractual (governed by escrow agreement) |
|---|---|
| Quebec (Civil Code) | Fiducie d'entiercement, art. 1260+ CCQ |
| US (UCC, state law) | Escrow holdback, contractual (escrow agreement + state law) |
| Common law | Escrow agent is fiduciary to both parties |
Typical escrow holdback structure
Standard market practice for mid-market deals:
- Size: 10-15% of purchase price for general indemnity escrow; up to 20% for tax indemnity or specific high-risk areas
- Duration: 12-18 months for general indemnities (matching survival period for general reps); 36 months or longer for tax indemnities; 6 years for fundamental reps (no escrow, but seller's general obligation)
- Release mechanics: scheduled release dates (e.g., 50% at 12 months, balance at 18 months) with claim retention provisions
- Escrow agent: typically a major bank's trust department or a specialized escrow service; fees split between buyer and seller
- Investment: escrowed funds may earn interest; interest accrues to the seller until and unless a claim is made
Claims procedure
The escrow agreement specifies the process when buyer makes an indemnification claim:
- Notice: buyer notifies seller and escrow agent of the claim, including amount and nature
- Disputed claims: if seller disputes, funds remain in escrow pending resolution (negotiation, mediation, arbitration, litigation)
- Undisputed claims: escrow agent releases funds to buyer after a defined dispute window (e.g., 30 days)
- Indemnity caps: claims against escrow are subject to the SPA's indemnity cap, basket, and de minimis thresholds
Alternatives to escrow holdbacks
Three main alternatives reduce or eliminate escrow:
- R&W insurance: insurance policy covers breaches, allowing for 'no escrow' or 'minimal escrow' deals. Increasingly common in mid-market and larger deals since 2018.
- Earn-out: contingent purchase price serves dual purpose — payment depends on performance, providing buyer with leverage to set off claims
- Promissory note: portion of purchase price as a seller note, with buyer retaining a right of set-off against indemnification claims
In Octelligence
M&A diligence and post-close support.
Sellers with clean Octelligence records typically negotiate smaller escrow holdbacks — counsel and buyers can verify reps with confidence. Post-close, claims often turn on what the records show.
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